Looming federal spending cuts will hit hospitals where it hurts

Hospitals across the country will face significant job losses, service reductions and other belt-tightening measures when President Barack Obama signs the order Friday implementing a series of automatic budget cuts.

The sweeping cuts, known as sequestration, would slash $85 billion by cutting jobs and government programs, ranging from Head Start to defense. It also would impose a 2 percent reduction in Medicare payments to hospitals, doctors and insurers, beginning in April.

More than 4,200 hospitals that are among the largest employers in their communities would lose nearly $3 billion under the Medicare cuts this year, according to an analysis by iVantage Health Analytics, a Maine health care research firm.

That could trigger the loss of 73,000 hospital jobs nationwide and tip the operating margins of nearly 100 hospitals from positive to negative, the company estimates.

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Hospitals projected to flip from operating in the black to the red include notable institutions like Cedars-Sinai Medical Center in Los Angeles, which faces an estimated $9 million cut in Medicare payments; Yale-New Haven Hospital in Connecticut, which could lose an estimated $6.4 million; Loma Linda University Medical Center in, Loma Linda, Calif., which stands to lose nearly $4 million in Medicare payments; and the Mayo Clinic Hospital in Phoenix, which is looking at an estimated $2.4 million loss.

Even though most hospitals are designated as “not-for-profit,” it’s important that their revenue match or exceed their costs in order to remain financially viable. Personnel is where many hospitals will begin paring costs to offset the cuts, because wages and salaries account for about 60 percent of a typical hospital’s budget.

“The sad part about it is that when you have hospitals switching from profits to losses, you know that the impact is going to be job-based,” said John Morrow, executive vice president at iVantage. “Because you just can’t operate in the red. It’s not a sustainable business model.”

In addition to large urban hospitals with thousands of employees, smaller rural hospitals will also feel the pain. According to the data, 63 rural hospitals could become unprofitable because of sequestration, compared to just 36 urban hospitals.

Rural hospitals are usually more dependent on Medicare for revenue than urban facilities. They also have tighter operating margins because they serve fewer patients, many of whom are either uninsured and cannot pay, or are enrolled in Medicaid, which has low reimbursement rates.

The 110-bed Caldwell Memorial Hospital in rural Lenoir, N.C., expects to lose $1 million in Medicare payments because of the mandatory budget cuts. Various provisions of the 2010 health care overhaul law, known as the Patient Protection and Affordable Care Act, a drop in federal support for indigent care and other funding declines will chop another $3 million in federal support from Caldwell’s budget this year.

“I’ve had one year in the last three or four that have had a positive operating margin, so these cuts from ACA and now sequestration, they run deep,” said Caldwell CEO Laura Easton.

Morrow said the analysis, which was made available to McClatchy on request, focused on general, acute care community hospitals and was based on each hospital’s most recent Medicare Cost Report filed with the federal government.

The findings exclude hospitals that don’t participate in the Medicare program, those that aren’t accessible by the general public and certain specialty health care facilities, including psychiatric, veterans, rehabilitation and children’s hospitals.

Salem Hospital in Salem, Ore., will lose about $3.5 million in Medicare payments and another $3.5 million in payments from Medicare Advantage plans, the private insurers that provide Medicare benefits. The $7 million hit will only deepen the hospital’s 23 percent annual losses on care to Medicare seniors, said Aaron Crane, chief finance and strategy officer at Salem Health, which runs the hospital. The losses are because of Medicare’s low payment rates.

Crane said job cuts are definitely in play, but he’ll also look at eliminating some medical services that are unprofitable.

That’s not unusual, said Richard Pollack, executive vice president of the American Hospital Association. Hospitals with lean profit margins may choose to downgrade their level of trauma care or eliminate historically unprofitable departments, like neonatal care and burn units, he said.

“It’s different for every hospital,” Pollack said. “Some will reduce staff. Others may require longer waits for care. Others will defer purchases of new technology. Some will have to delay capital improvements. Every hospital will have a different situation.”

An earlier study commissioned by the hospital association, the American Medical Association and the American Nurses Association estimates that nearly 500,000 jobs – in and out of the health care sector – would be lost or not created in 2013 if the 2 percent sequester cuts go through.

At Loma Linda medical center, officials are weighing service cutbacks as they try to fill a $3.5 million to $4 million cut in their Medicare funding that could make the hospital unprofitable this year. With 7,000 employees, Loma Linda is also likely to cut jobs through attrition and other means, rather than through direct layoffs, said chief financial officer Steve Mohr.

In Potosi, Mo., the 25-bed Washington County Memorial Hospital also will rely on attrition to thin the ranks. It faces a $144,000 cut in Medicare funds.

"We’re planning ahead and not filling jobs as they’re vacated until we can get an idea of the true impact," said CEO Leah Osbahr. “You’re talking about the jobs just to offset this, but we have to be prepared if they cut further."

Not long ago, hospitals could simply pass the funding cut on to private insurers that paid higher rates than Medicare.

“It’s really not an option today because more and more of the commercial payers are adopting Medicare-like payment rates,” said Jerry Fedele, president and CEO of Boca Raton Regional Hospital in Florida. “So as you look at running a hospital into the future, there is no real opportunity to cost-shift from government to commercial payers.”

Fedele said the hospital’s estimated $3.5 million cut in Medicare payments won’t cause it to lose money this fiscal year, but it will require budget adjustments in 2014. About 65 percent of the hospital’s revenue comes from Medicare, he said.

For a large rural hospital with annual revenue of $20 million, Medicare typically accounts for about half of the payments, said Jimmy Lewis, CEO of Hometown Health LLC, a trade association of 56 rural hospitals in Georgia and north Florida. Losing 2 percent through sequestration, or $400,000, is the equivalent of losing two doctors from the staff, Lewis said.

Once they’re gone, they’re tough to replace because most doctors and their families want an urban lifestyle with more family-friendly hours, Lewis said. Recent medical school graduates who have trained in new technology that rural hospitals may not have are especially tough to recruit.

“The first thing they ask is, ‘Where are you on electronic health records? Where are you on digital radiology? Where are you on your telemedicine capability?’” Lewis said. “And if you don’t have all that, they just say, ‘Sorry Charlie, we won’t be there.’”